• What's in Your...Phone?

    Soon we may be able to do away with plastic credit cards altogether.  Charlotte N.C.-based Bank of America is trying out a pilot program to bank by mobile phone. Bank employees will have the opportunity to pay for purchases by scanning with their smartphones. 


    Reuters (Sep 27, 2012) reports:


    With sophisticated mobile phones reaching a growing number of people around the world, financial services companies, startups as well as technology giants such as Google and eBay Inc's PayPal, are looking for ways to turn phones into digital wallets that house credit and debit cards, coupons and store loyalty program details.


    A program like this is likely to be attractive to bank customers when it becomes available. Gone are the days when folks were leery of e-commerce or shopping online. Today, consumers want to be able to just about anything at the click of a mouse. Including banking.


    According to this recent eMarketer newsletter, “Seven in 10 online bank customers want to be able to make any type of transaction on the web.” 


    The article is based on a 2012 survey by Capgemini and Efma of banking customers in 35 countries. 


    From the article:


    Overall, banking customers said that their online banking experiences were increasingly seen as “positive” in all geographic regions. But the satisfaction rate was highest in North America, at 63% in 2012, with the second-highest rate coming from Central Europe at 56%.


    Customer satisfaction with mobile banking services was much more uneven across different geographic areas, however. In North America, the positive experience metric for mobile banking fell 2 percentage points between 2011 and 2012, indicating that institutions were not keeping pace with their customers’ expectations.


    Read more here


    For discussion:


    What are the benefits and limitations of mobile banking and mobile payments?


  • What's Said on Facebook, Stays on Facebook.

    A new California law prohibits companies and universities from asking for personal passwords to email and Facebook. 


    MercuryNews.com (Rosenberg, 9/27/2012) reports:


    Recent accounts of employers asking for personal passwords or requiring applicants to open their Facebook pages during interviews sparked the new laws.


    Companies and universities are increasingly trying to keep tabs on workers and students -- and vet prospective hires and admissions--by monitoring their personal pages like Twitter and Google (GOOG)+ to see if they've posted anything like drunk photos or insensitive comments. But many people block public access to these posts through privacy settings.


    Then in March, details of Maryland correctional officials asking for access to job applicants' personal Facebook accounts led to similar stories around the nation. Some people said they were turned down for jobs after refusing to give employers their social media information, prompting lawmakers around the nation to propose bills banning the practice.


    The article goes on to warn readers that nothing prevents potential employers to look at your Facebook page if it is public.  So be careful what you post.


    For discussion:


    According to the article, why is this law particularly important to financial firms?  Why would firms in this industry oppose this law?




  • Bank Cyberattackers Strike

    This past week, some of the biggest banks in the country were under cyberattack.  Beginning with Bank of America and most recently PNC Bank, cyberattackers sent targeted web traffic to these bank websites and caused them to slow down or crash.


    According to CNN Money (27 Sep 2012):


    "The volume of traffic sent to these sites is frankly unprecedented," said Dmitri Alperovitch, co-founder of CrowdStrike, a security firm that has been investigating the attacks. "It's 10 to 20 times the volume that we normally see, and twice the previous record for a denial of service attack."


    To carry out the cyberattacks, the attackers got hold of thousands of high-powered application servers and pointed them all at the targeted banks. That overwhelmed Bank of America and Chase's Web servers on Sept. 19, Wells Fargo and U.S. Bank on Wednesday and PNC on Thursday. Fred Solomon, a spokesman for PNC, confirmed that a high volume of traffic on Thursday was affecting users' ability to access the website, but he declined to go into more detail.


    Denial of service attacks are an effective but unsophisticated tool that doesn't involve any actual hacking. No data was stolen from the banks, and their transactional systems -- like their ATM networks -- remained unaffected. The aim of the attacks was simply to temporarily knock down the banks' public-facing websites.


    For discussion:


    Why would someone initiate these cyberattacks?



  • The Value-Added of Financial Planning

    New research from Morningstar finds that financial planning can add 1.82% extra value per year for investors.  The added value is called “gamma” by Morningstar.


    In a season when interest rates are near zero, added value is something to brag about.


    From the Wall Street Journal’s Market Watch commentary (26 Sep 2012), investors can earn this “gamma” by making efficient financial planning decisions regarding their retirement portfolio:


    The five key decisions boil down to asset allocation, withdrawal strategy, tax-efficiency, product allocation (the use of traditional investment products versus guaranteed-income products), and “liability-driven investing” (which is investing with an eye toward an investor’s specific goals, needs and timeline).


    Through simulations, Morningstar’s researchers found that a hypothetical retiree could generate nearly 30% more income using a Gamma-efficient retirement-income strategy.


    That’s equal to kicking up the annual arithmetic return by 1.82% compared to the average person making those same decisions.


    For discussion:


    Do you believe that hiring a financial planner is valuable for your retirement?


  • What's Your Credit Score?

    A recent study by the Consumer Financial Protection Bureau (CFPB) found that the credit scores we buy from credit agencies may be quite different from the credit scores that lenders buy from the same agencies. 


    From the report:


    Consumers cannot know ahead of time whether the scores they purchase will closely track or vary moderately or significantly from a score sold to creditors. Thus, consumers should not rely on credit scores they purchase exclusively as a guide to how creditors will view their credit quality.


    Most of the time, the scores are similar—73% to 80% of the time, in fact. However, for some borrowers, the differences can be substantial and can result in being denied a loan.


    According to Bloomberg (Dougherty, 25 Sep 2012):


    “This is like choosing what college to apply to without knowing your SAT or ACT scores, or whether the college uses ACT or SAT,” Chi Chi Wu, an attorney with the Boston-based National Consumer Law Center, said in an interview.


    For discussion:


    What leads to differences in credit scores?


    What are the potential negative outcomes for consumers if they do not see an accurate credit score before applying for a loan?


  • Universities Have Credit Ratings Too

    Amherst College in Massachusetts was downgraded by S&P yesterday.  The prestigious liberal-arts college saw its debt slide from AAA to AA+ because of the losses it suffered after the financial crisis.  


    From a Bloomberg article by McDonald and Chappatta (21 Sep 2012):


    Amherst has been seeking to recover from the crash, when it suffered deep investment losses and was left short of cash because of its holdings of hard-to-sell assets such as private equity funds. Harvard University and at least 14 other elite universities sold taxable bonds after the crisis to have sufficient cash on hand. Amherst borrowed $100 million in 2009.


    The college, which counts Nobel Prize-winning economist Joseph Stiglitz as an alumnus, is restarting stalled projects, including a $244 million science center, S&P said. It’s preparing to sell an additional $100 million of taxable bonds, significantly increasing its debt burden, which consumes 11.9 percent of its operating expenses, the New York-based rating company said.


    For discussion:


    Why is the credit rating so important to borrowers like Amherst college?



  • Trash to Treasure

    It’s every yard-saler’s dream.  Find that piece of junk only to discover that it’s hidden treasure.


    Apparently, a woman in West Virginia has done just that.  According to this Associated Press article on CNBC.com:


    A woman who paid $7 for a box of trinkets at a West Virginia flea market two years ago apparently acquired an original painting by French impressionist Pierre-Auguste Renoir without knowing it.


    The woman considered discarding the painting to salvage its frame, but instead made an appointment to have it evaluated in July by the Potomack Co. auction house in Alexandria, Va., said its fine arts director Anne Norton Craner.


    What a find.


    According to the article, this piece was painted by Renoir in 1879 and later sold for 5,000 francs in 1925.  It is expected to sell for $75,000 on September 29th when it goes up for auction.


    For discussion:


    If the U.S. dollar was worth 18 French Francs in 1925, what is the annual rate of return on this painting?



  • Wal-Mart Versus Amazon

    Wal-Mart announced today that it would stop selling Amazon Kindles. The retailer is joining Target in cutting ties with its online competitor, Amazon.  Amazon did not respond in public.


    What do you think went into the decision by Wal-Mart? Was it an attempt to cripple the competition? Was it in response to negotiations with Amazon over the wholesale price of Kindles? Or was it simply non-positive NPV proposition and time to get out.  Hard to tell.


    According to the NY Times (Clifford and Bosman, 20 Sep 2012)


    Wal-Mart did not specify why it was discontinuing its Kindle sales, but analysts said it was not hard to decipher, given that the retailer will still sell similar devices from companies like Apple, Google, Barnes & Noble and Samsung.


    Physical retailers have been worried about customers who browse in stores and then buy from online competitors instead. Displaying the new Kindles encourages that behavior, analysts said.


    Of course for Amazon, this may not have much impact. Kindles can be purchased online with ease. And some brick-and-mortar retailers like Best Buy and Staples continue to carry the line of e-readers. Still, to lose physical retail space before the Christmas season is a blow to Amazon.


  • Banks Compete for Savers

    Our current low interest rate environment has been the subject of many news articles and even a few blog posts here.  So when banks start to offer slightly higher interest rates on savings, we notice.


    From SmartMoney by AnnaMaria Andriotis (18 Sep 2012):


    Last month, Sallie Mae Bank, a subsidiary of Sallie Mae Inc., increased the annual yield on its money market account to 1% — the second increase since July, when the yield was 0.85%. Ally Bank raised its savings and money market account yields twice over the same period, from 0.84% to 0.95%. In August, American Express Bank’s savings account yield rose to 0.90%; in May, it was 0.75%


    According to the article, changes this small would have been “small potatoes” in any other interest rate environment.  But an increase from 0.75% to 0.90% is a 20 percent increase, even if it is only 15 basis points in size. 


    These changes raise a couple of questions:


    1.     Why are banks trying to woo savers?  

    2.     Will it work?


    For banks, savings and checking accounts are a favorite source of funds, especially when rates are so low.  However, if you’re an investor looking at a 0.75% return on your savings, would you make the switch to a new bank?  I guess…maybe.  Well, probably not.  The cost to switch to a new bank is quite high, not to mention the inconvenience of changing all your automatic payments.  If others feel the same way, then the increase in rates is not likely to do much to attract new savers. 


  • Sticky Mortgage Rates

    While interest rates are already very low, this article in the NY Times suggests that they could (should) be even lower still.

    From the NY Times (Eavis, 18 September 2012):

    Imagine a 30-year mortgage on which you only pay 2.8 percent in interest a year.

    Such a mortgage could already exist, but something in the banking system is holding it back. And right now, few agree on what that “something” is.

    Getting to the bottom of this enigma could help determine whether mortgage lenders are dysfunctional, greedy or simply trying to do their job in a sensible way.

    The author describes mortgage rates as “stuck.” Even though banks are paying lower rates to access funds, they are not passing the savings on to their borrowers.  Though several theories try to explain this “puzzle,” none has been able to do a thorough job of explaining why borrowers are not seeing mortgages at 2.8 percent.

    For discussion:

    What are the potential explanations for these "sticky" mortgage rates? Do these explanations make sense or can they be refuted?


  • The "Hidden Tax" of Low Interest Rates

    When the increase in the cost of living is greater than interest rates, savers are punished. Borrowers on the other hand can borrow at rates near zero, while savers earn nothing at all. That is the case in our current market.


    From the NY Times (10 Sep 2012):


    Though bad for people trying to live off their savings, low interest rates happen to be quite good for anyone borrowing money, like governments themselves. Over time, interest rates below the inflation rate allow governments to refinance, erode or liquidate their debt, making it easier to live within their budgets without having to resort to more unpalatable spending cuts or tax increases.


    Along with keeping rates low, governments are using a variety of tactics to encourage captive audiences, like pension funds and banks, to buy their debt. Consumers, in other words, are subtly subsidizing governments without even knowing it. Economists have compared this phenomenon to a hidden tax on people’s wealth.


    This practice of “financial repression” has been done before.  After World War II, low rates helped the U.S. and Japan recover from the debt they accumulated during the war.  Today, however, the economy is not growing as it was back then, so the “hidden tax” may be causing more pain than good. 


    Unfortunately, the pain is felt by savers and retirees.


  • Change at the DJIA



    The Dow Jones Industrial Average is dropping Kraft from is list of included stocks.  Replacing Kraft is UnitedHealth.  Though they could have chosen another consumer staples firm, they decided to include a health care company to be among the list of 30 companies that represent the U.S. stock market.


    For discussion:


    Go to the Dow Jones website.  What is the Dow Jones Industrial Average (DJIA)?


    Why is Apple not included in the Dow Jones?


    What is a price-weighted index?  What would happen to the DJIA if Apple was included in the index?


  • Happy Apple Shareholders

    Quiz: What stock trades higher than $680 per share and is still considered “cheap” by many analysts?

    Answer: Apple (ticker AAPL).

    One day after announcing its newest iPhone, AAPL shares closed at $682.98 per share.  The shares are up 66% for the year and yet analysts predict that the price could go up further.  With a P/E ratio of 13, AAPL seems relatively “cheap” because investors are only paying about 13 times earnings—a bargain to many.  (read about it in CNNMoney)



    For discussion:

    What is a P/E ratio and what does it indicate about a firm?

    How does Apple’s P/E compare with the average P/E of the S&P 500?

    Would you buy this stock?


  • Big Insurance Cost for Small Ticket Items

    Do you buy the extended warranties on your cameras, cell phones, and computers?  When your electronics get dropped in a puddle, you'll probably feel lucky to be insured.  But most of the time, extended warranties are money down the drain.


    According to this Consumerism Commentary by Luke Landes, you can build your own extended warranties.  Here’s how:


    Step 1. When you purchase an item, make note of the cost of the extended warranty. Don’t buy it.


    Step 2. Transfer this amount to a special savings account that you will not touch until one of your “protected” items needs to be repaired. ING Direct lets you create sub-accounts, one of which you can name “My Extended Warranties” or “Warranty Fund.” Don’t create a sub-account for each item. One for all of your items will do. Thus, the “Warranty Fund” is pooled.


    Step 3. Repeat steps 1 and 2 using the same Warranty Fund you already created for all products you buy that might break or are associated with an extended warranty. This will build up a sizable Warranty Fund in your own name at your own bank earning interest for you.


    Step 4. When one of your self-insured products breaks or otherwise needs repairs, dip into your Warranty Fund. Try to avoid using your Emergency Fund unless the Warranty Fund doesn’t cover the full expense and the product must be fixed or replaced.


    Downside? If you’re careless or in a line of work where your electronics will get damaged easily, then you may not have money enough set aside.  Upside, however, is that you are not likely to have all your electronics break at once, so you can hang on to your own money until the repair or replacement cost is needed. 


    For discussion:


    How do warranty companies earn a profit?


    What additional information about the item being insured would help you decide whether or not to purchase the extended warranty?


  • Bigger Balance Sheets, More Debt, Nervous Shareholders

    Plains Exploration (PXP) is buying assets from BP and Royal Dutch Shell, and they’re borrowing a ton of money to do it. 


    According to Fontevecchia at Forbes (10 Sep 2012):


    In a high-risk move, Plains Exploration (PXP) is levering up big time in order to acquire wells in the Gulf of Mexico from the BP and Royal Dutch Shell.  PXP will be tapping credit facilities in order to fund the $6.1 billion purchase of wells which are worth more than the entire market capitalization of the company.  Initial financing, the company noted, will be fully provided by a consortium of six banks including JPMorgan Chase and Bank of America.  Given the swelling of its balance sheet, PXP’s shares fell more than 10% on Monday.


    In terms of priority of payments, shareholders come after lenders.  And they know it.  That’s why when a company acquires all kinds of new assets and uses a bunch of new debt to do it, shareholders get nervous. 


    Management at PXP believes this is a good move.  Time will tell whether the new project will deliver the cash flow needed to repay the debt.


    For discussion:


    What happened to the price of PXP shares after the announcement?  What about the shares of BP and Royal Dutch Shell?  What are possible explanations for the changes in these stock prices?


  • Taxes and Nonprofit Organizations

    Local governments need money, and they may look for new ways to get it: taxing not-for-profit institutions like colleges and hospitals.


    Municipalities rely on tax revenues to pay for the services they provide to the local communities, services like local police and emergency assistance. But for the municipalities where hospitals and colleges own a big chunk of the property, tax revenues are limited.


    Citing an Aug 29, 2012 study by the Urban Institute, the Motley Fool reports:


    As the Urban Institute paper notes, large nonprofits that are exempt from taxation present a huge challenge to municipalities. On one hand, they often represent a huge economic opportunity for a city or town, especially in small towns that rely almost exclusively on a college or hospital for their citizens' employment and income.


    Yet those benefits don't come free. Having thousands of students can put a huge burden on traditional city services like police and utilities, yet when universities aren't subject to property taxes on the buildings and land they own, other town taxpayers can get left footing the bill.


    For discussion:


    What are the arguments in favor of taxing traditionally not-for-profit institutions?


    What are the arguments against taxing nonprofits?



  • Who Should You Blame if You Lose Money in Stocks?

    If you’re Mark Cuban, owner of the Dallas Mavericks basketball team, you blame yourself and no one else. 


    Jonathan Weil’s latest article on Bloomberg quotes Cuban’s blog about his Facebook (FB) shares:


    “I bought and sold FB shares as a TRADE, not an investment. I lost money. When the stock didn’t bounce as I thought/hoped it would, I realized I was wrong and got out. It wasn’t the fault of the FB CFO that I lost money. It was my fault. I know that no one sells me shares of stock because they expect the price of the stock to go up. So someone saw me coming and they sold me the stock. That is the way the stock market works. When you sit at the trading terminal you look for the sucker. When you don’t see one, it’s you. In this case it was me.”


    So what’s the difference between investing and trading and gambling?  Is there any difference at all?  Some would argue investment time horizon.  If you’re in it for the long-haul, then you’re an investor.  If you’re looking for a quick profit, you may be a trader.  And the distinction between a trader and a gambler…well, that’s a little tricky.


    In the end, Weil argues, “Buyer beware.”


    What do you think?

    Are small investors doomed to being outsmarted by the professional “insiders?”


    If you try to beat the market, are you gambling and deserve whatever comes your way?


    Is someone to blame for the decline in the value of FB shares?


    What is FB really worth?



  • Your Savings Account: Interest Income or Interest Expense?

    Which would you rather have—one dollar today or one dollar tomorrow?


    The obvious answer has always been one dollar today.  That way you can put the dollar in the bank, earn interest, and have more than one dollar tomorrow.


    But that financial principle would no longer hold true if interest rates fall below zero percent.


    From BloombergBusinessweek (Aug 31, 2012):


    Imagine a world of negative interest rates. Instead of paying you interest on deposits, your bank would charge you for storing cash in its vault. Instead of waiting until the last minute to pay your bills, you would pay them as quickly as possible in order to reduce the cash in your checking account. People would keep cash at home instead of in the bank. For the sake of convenience, they would clamor for denominations bigger than the $100 bill


    According to Fed economists, Garbade and McAndrews (29 Aug 2012), negative interest rates would lead to financial innovation.  People would prefer to prepay rather than borrow.  Cash would be safeguarded, maybe even hoarded.  New special-purpose banks might emerge.  But the innovation could come with new problems for the financial services industry. 


    For discussion


    Why might investors be willing to deposit their money in a bank and earn a negative interest rate?  Would they be better off simply holding cash?


    What kinds of innovations from negative interest rates do Garbade and McAndrews foresee?  


    What are some unexpected problems that could arise as a result of negative interest rates?




  • Gold: A Tangible Way to Save Money

    In a world of limited gold but unlimited paper money, Bill Gross says that gold is a better investment than stocks or bonds.  The often-quoted co-CEO of the Pacific Investment Management Company (PIMCO) tells us that gold is a good place to store your money. 

    How can you invest in gold? 

    One is to simply buy the shiny metal in the form of jewelry.  Another is to buy exchange traded funds that invest in gold or other commodities. 

    According to Mr. Gross, central banks have trillions of dollars of gold reserves.   Maybe we should be holding some too.


  • Ratio Analysis for Ethan Allen

    This April 2012 interview of Ethan Allen CEO, Farooq Kathwari, with CNBC’s Mad Money host, Jim Cramer, gives us a glimpse into Ethan Allen’s financial statements.


    According to the interview, sales are up, earnings are growing, and the company is doing what it can to take advantage of opportunities it sees overseas.


    For discussion:

    Based on the interview here, what changes in the financial ratios should we expect for Ethan Allen?


    If we decompose the Return on Equity (ROE) using a DuPont analysis, what are the factors driving the earnings growth at Ethan Allen?